Netflix Notches Growth, But Is Slowed By Emerging Streaming Competition

The streaming wars have started in earnest, and with the first Netflix earnings reports since late 2019, dual launches of Disney+ and Apple TV’s streaming services clearly have the digital streaming giant starting to feel the pinch.  Netflix reported earnings for the first quarter (Q4 2019) where the new competition officially entered the scene yesterday (Jan. 21), and though it beat on both top and bottom line expectations, domestic subscriber growth was weaker than forecast and guidance for Q1 was less robust that what analysts had been looking for.

By the numbers, Netflix reported EPS of $1.30 and revenue roughly in line (though slightly ahead) with analyst predictions at $5.47 billion.  That, investors liked.  What they liked somewhat less was the subscriber growth data.  Netflix reported 550,000 new subscribers in its domestic North American market, missing the 589,000 forecast by FactSet and down from the 1.75 million new domestic users Netflix reported this time last year.  Globally, however, growth was stronger than expected, with 8.33 million new global subscribers added vs the 7.17 million forecast before the report.

The drop off in U.S. subscription figures was explained by Netflix’s shareholder letter, which essentially breaks the issue down into two sub issues: “recent price changes and two U.S. competitive launches.” That thought was reiterated by Netflix Chief Financial Officer Spencer Neumann during Netflix’s prerecorded analyst interview where he reported the final quarter of 2019 had seen “elevated churn” in the U.S. due to higher pricing and new competition. The company did note, however, that it has seen a “more muted impact” from competitive launches outside the U.S.

That likely owes to the fact that competitors like Disney have yet to launch their services globally.

“As always, we are working hard to improve our service to combat these factors and push net adds higher over time,” the firm noted in its shareholder letter.

The firm also reported that it would be working on improving its free cash flow, which as of last quarter was negative $1.7 billion. Netflix reiterated that its cash burn peaked in 2019 and is now heading toward positive territory in the future.

“We’re on the glide path, slowly, towards positive free cash flow,” Netflix CEO Reed Hastings said on the company’s earnings call. “We’re excited about that, but that’s not coming from shrinking back our content spending. That’s coming from the increase in revenue and operating income.”

Advertising, Hating reiterated on the same call, is not part of the long term plan, as it would conflict with Netflix’s central stated goal of “streaming and customer pleasure” according to Hastings.  Moreover, he noted, Facebook, Google and Amazon have done a very effective job in the world of digital advertising thanks in large part to all the customer data they collect. Hastings noted this is likely not a place where Netflix should even try to compete because using and leveraging data at that level is above its pay grade.

“Instead, we think if we don’t have exposure to that … we’re in a much more positive place,” Hastings said on the call. “We’re not integrating everybody’s data, we’re not controversial that way. We’ve got a much simpler business model.”

But though adds aren’t jumping onto the platform, Netflix did announce some big changes — particularly to how it measures what content is being watched by subscribers. Under the old system, the streamer had to watch 70 percent of something for it to count as an intentional view.

Now, Netflix will count a view as any content that has been watched for at least two minutes, which is “long enough to indicate the choice was intentional.” This methodology, the streaming firm noted, is much closer to what YouTube does in terms of counting impressions. By this metric, Netflix boasted its fantasy series “The Witcher” was watched by 76 million households in the first month of its release, making it Netflix’s most successful premier yet.

All eyes are now turned to Q1, wherein Netflix forecasts earnings of $1.66 per share on revenue of $5.73 billion. That’s compared to analyst expectations for earnings of $1.20 per share and $5.76 billion in revenue. The firm also expects to add 7 million paid customers in the first quarter, a bit short of analysts expectations for 7.86 million subscribers.

The remainder of the year, however, is what the market is really watching, particularly how Netflix weathers even more big names in entertainment formally joining the streaming wars.  NBCUniversal Rolls out the Peacock streaming network in July, while AT&T Time Warner will be introducing HBO Max In May.

Thus far, Netflix says it welcomes the new competition in the market.